Your Farm
Income Statement
H
ow much did your farm business earn last
year? Was it profitable? There are many
ways to answer these questions.
A farm income statement (sometimes called a
profit and loss statement) is a summary of income
and expenses that occurred during a specified
accounting period, usually the calendar year for
farmers. It is a measure of input and output in
dollar values. It offers a capsule view of the value
of what your farm produced for the time period
covered and what it cost to produce it.
Most farm families do a good job of keeping
records of income and expenses for the purpose
of filing income tax returns. Values from the tax
return, however, may not accurately measure the
economic performance of the farm. Consequently,
you need to have a clear understanding of the
purpose of an income statement, the information
needed to prepare the statement, and the way in
which it is summarized.
Net farm income, as calculated by the accrual or
inventory method, represents the economic return
to your contributions to the farm business: labor,
management, and net worth in land and other
farm assets. Cash net farm income also can be
calculated. It shows how much cash was available
for purchasing capital assets, debt reduction,
family living, and income taxes.
Preparing the Statement
The income statement is divided into two parts:
income and expenses. Each of these is further
divided into a section for cash entries and a section
for noncash (accrual) adjustments.
An example income statement is shown at the end
of this publication. Blank forms for developing
your own income statement are available in ISU
Extension and Outreach publication FM 1824/
AgDM C3-56, Farm Financial Statements.
Most of the information needed to prepare an
income statement can be found in common farm
Ag Decision Maker
File C3-25
business records. These include a farm account
book or program, Internal Revenue Service
(IRS) forms 1040F (Profit or Loss From Farming)
and 4797 (Sales of Business Property), and your
beginning and ending net worth statements for
the year. If you use the IRS forms, you will need to
organize the information a bit differently to make
allowances for capital gains treatment of breeding
stock sales and the income from feeder livestock or
other items purchased for resale.
Cash Income
Cash income is derived from sales of livestock,
livestock products, crops, government payments,
tax credits and refunds, crop insurance proceeds,
and other miscellaneous income sources.
•Include total receipts from sales of both raised
livestock and market livestock purchased for
resale. Remember not to subtract the original
cost of feeder livestock purchased in the previous
year, even though you do this for income tax
purposes. Also include total cash receipts from
sales of breeding livestock before adjustments
for capital gains treatment of income are made.
These are termed “gross sales price” on IRS Form
4797.
•Do not include proceeds from outstanding USDA
marketing loans in cash income even if you
report these as income for tax purposes. Grain
under loan is part of your ending crop inventory
and would be counted twice in the calculation of
net income if it were included in cash receipts as
well.
•Do not include sales of land, machinery, or other
depreciable assets; loans received; or income
from nonfarm sources in income.
Adjustments to Income
Not all farm income is accounted for by cash sales.
Changes in inventory values can either increase
or decrease the net farm income for the year.
Changes in the values of inventories of feed and
FM 1816
Revised
April 2017
Page 2
grain, market livestock, and breeding livestock can
result from increases or decreases in the quantity of
these items on hand or changes in their unit values
(see Example 1). Adjusting for inventory changes
ensures that the value of farm products is counted
in the year they are produced rather than the
year they are sold. Subtract beginning of the year
values from end of the year values to find the net
adjustment.
Changes in the market values of land, buildings,
machinery, and equipment (except for
depreciation) are not included in the income
statement unless they are actually sold. Accounts
receivable and unpaid patronage dividends are
included, however, because they reflect income
that has been earned but not yet received.
Cash Expenses
All cash expenses involved in the operation of the
farm business during the business year should be
entered into the expense section of the income
statement. These can come from Part II of IRS
Schedule F. Under livestock purchases include
the value of breeding livestock as well as market
animals.
•Do not include death loss of livestock as an
expense. This will be reflected automatically by a
lower ending livestock inventory value.
•Income tax and Social Security tax payments are
considered personal expenses and should not be
included in the farm income statement, unless
the statement is for a farm corporation.
•Interest paid on all farm loans or contracts is a
cash expense, but principal payments are not.
•Do not include the purchase of capital assets
such as machinery and equipment. Their cost
is accounted for through depreciation. Land
purchases also are excluded.
•You may wish to exclude wages paid to family
members because these also are income to the
family.
Your Farm Income Statement
Example 1
The beginning inventory of feeder pigs consists
of 420 head valued at $75 each, or $31,500.
Ending inventory is 450 head valued at $50
each, or $22,500. Inventory value decreased by
$9,000 even though the number of pigs on hand
increased by 30 head. The decline in value per
head more than offset the increase in numbers,
and could have been due to lower market prices
and/or lighter weight of the pigs.
Example 2
Beginning inventory of fertilizer was zero.
Closing inventory is worth $11,000. Fertilizer
purchases during the year were $16,000, all
paid for. The change in inventory is a positive
$11,000. Even though $16,000 is shown for
cash expense, only $5,000 ($16,000 – $11,000)
is charged to the farm operation during the
year covered. The $11,000 of fertilizer still
unused will be the beginning inventory value
for the following year, and will be included in
that year’s expenses.
Adjustments to Expenses
Some cash expenses paid in one year may be
for items not actually used until the following
year. These include feed and supply inventories,
prepaid expenses, and investments in growing
crops. Subtract the ending value of these from the
beginning value to find the net adjustment (see
Example 2).
Other expenses may be incurred in one year but
not paid until the following year or later, such
as accrued interest, farm taxes due, and other
accounts payable. Record accounts payable so that
products or services that have been purchased but
not paid for are counted. However, do not include
any items that already appear under cash expenses.
Subtract the beginning total of these items from
the ending totals to find the net adjustment.
The final expense item is depreciation, or
the amount by which machinery, equipment,
buildings, and other capital assets decline in value
due to use and obsolescence. The depreciation
deduction allowed on your income tax return can
Page 3
Your Farm Income Statement
be used, but you may want to calculate your own
estimate based on more realistic depreciation rates.
One simple procedure is to multiply the value of
these assets at the end of the year by a fixed rate,
such as 10 percent. This way you can group similar
items, such as machinery, rather than maintain
separate records for each item.
If you include breeding livestock under beginning
and ending inventories, do not include any
depreciation expense for them.
The beginning and ending net worth statements
for the farm are a good source of information
about inventory values and accounts payable
and receivable. ISU Extension and Outreach
publication FM 1791/AgDM C3-20, Your Net
Worth Statement, provides more detail on how
to complete a net worth statement. ISU Extension
and Outreach publication FM 1824/AgDM C3-56,
Farm Financial Statements, contains schedules
for listing adjustment items for both income and
expenses. Use the same values that are shown on
your beginning and ending net worth statements
for completing adjustments to your net income
statement for the year.
Summarizing the Statement
You have now accounted for cash farm income
and cash expenses. You also have accounted for
depreciation and changes in inventory values of
farm products, accounts payable, and prepaid
expenses. You are now ready to summarize two
measures of farm income.
Net Farm Income from Operations
Subtract total farm expenses from total farm
income. The difference is the net income generated
from the ordinary production and marketing
activities of the farm, or net farm income from
operations.
Capital Gains and Losses
Some years income is received from the sale
of capital assets such as land, machinery, and
equipment. The sale price may be either more or
less than the cost value (or basis) of the asset.
For depreciable items the cost value is the
original value minus the depreciation taken.
For land it is the original value plus the cost of
any nondepreciable improvements made. The
difference between the sale value and the cost
value is a capital gain or loss. For purposes of the
farm income statement, capital gain would also
include the value of “recaptured depreciation”
from the farm tax return. Information for
calculating capital gains and losses can come from
the depreciation schedule and/or IRS Form 4797.
Sales of breeding livestock can be handled two
ways: (1) record sales and purchases as cash
income and expenses, and adjust for changes in
inventory, or (2) record capital gains or losses
when animals are sold and include depreciation as
an expense. Either method can be used, but do not
mix them.
Net Farm Income
Add capital gains or subtract capital losses from
net farm income from operations to calculate net
farm income. This represents the income earned
by the farm operator’s own capital, labor, and
management ability. It also represents the value
of everything the farm produced during the year,
minus the cost of producing it.
Further Analysis
Net farm income is an important measure of the
profitability of your farm business. Even more
can be learned by comparing your results with
those for other similar farms. ISU Extension and
Outreach publication FM 1845/AgDM C3-55,
Financial Performance Measures for Iowa Farms,
contains information about typical income levels
generated by Iowa farms. It also illustrates other
important measures and ratios that can help you
evaluate the profitability, liquidity, and solvency of
your own business over time.
Other Financial Statements
Two other financial statements are often used
to summarize the results of a farm business.
While they are not as common as the net income
statement and the net worth statement, they do
provide useful financial information.
Page 4
Your Farm Income Statement
Statement of Cash Flows
Statement of Owner Equity
A statement of cash flows summarizes all the cash
receipts and cash expenditures that were received
or paid out during the accounting year. It is
sometimes called a flow of funds statement. Unlike
the net income statement, it does not measure the
profitability of the business. It merely shows the
sources and uses of cash. The statement of cash
flows is divided into five sections:
The statement of owner equity ties together
net farm income and the change in net worth.
Net worth will increase or decrease during the
accounting year based on three factors:
•cash income and cash expenses
•adjustments to the market value of capital assets
(affects market value net worth only)
•purchases and sales of capital assets
•new loans received and principal repaid
•nonfarm income and expenses (sole proprietor)
•beginning and ending cash on hand
If all cash flows are accurately recorded, the total
sources of cash will be equal to the total uses of
cash. If a significant difference exists, the records
should be carefully reviewed for errors and
omissions.
•net farm income (accrual)
•net nonfarm withdrawals (nonfarm income
minus nonfarm expenditures)
If these factors are recorded accurately and added
to the beginning net worth of the farm, the result
will equal the ending net worth.
An example of a statement of owner equity is
found at the end of this publication.
An example of a statement of cash flows is found
at the end of this publication.
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[email protected]
www.extension.iastate.edu/agdm
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Page 5
Your Farm Income Statement
Net Farm Income Statement Example
Cyclone Farm
Name
Year 2017
Income
Cash Income (numbers in ( ) refer to IRS Sch. F)
Sales of livestock bought for resale (1a)
$423,735
Sales of raised livestock, grain, etc. (2)
451,028
Cooperative distributions paid (3b)
4,280
Agricultural program payments (4b)
Crop insurance proceeds (6b)
Custom hire income (7)
8,740
Other cash income (8)
2,563
Sales of breeding livestock
5,680
Hedging accounts withdrawals
3,000
a. Total Cash Income
$899,026
Income Adjustments
Hedging accounts balance
Crops held for sale or feed
Market livestock
Accounts receivable
Unpaid cooperative distributions
Breeding livestock
Other current assets
Subtotal of income adjustments
b. Net income adjustment (ending - beginning)
c. Total Farm Income (a + b)
Beginning
Expense Adjustments (paid in advance)
Investment in growing crops
Commercial feed on hand
Prepaid expenses
Supplies on hand
Subtotal of adjustments
e. Net adjustment (beginning - ending)
Expense Adjustments (due)
Accounts payable
Farm taxes due
Accrued interest
Subtotal of adjustments
f. Net adjustment (ending - beginning)
Beginning
Ending
$41,500
538,150
296,160
15,445
24,581
201,000
$47,909
489,105
329,403
28,861
222,600
$1,116,836
$1,117,878
$1,042
$900,068
Expenses
Cash Expenses (numbers in ( ) refer to IRS Sch. F)
Car and truck expenses (10)
Chemicals (11)
$18,456
Conservation expenses (12)
Custom hire (13)
9,589
Employee benefits (15)
Feed purchased (16)
179,150
Fertilizer and lime (17)
75,890
Freight, trucking (18)
15,690
Gasoline, fuel, oil (19)
11,899
Insurance (20)
18,913
Interest paid (21a + 21b)
25,442
Labor hired (22)
13,654
Pension and profit-share plans (23)
Rent or lease payments (24a + 24b)
125,600
Repairs, maintenance (25)
13,136
Seeds, plants (26)
56,800
Storage, warehousing (27)
Supplies purchased (28)
4,890
Taxes (farm) (29)
8,800
Utilities (30)
4,629
Vet. fees, medicine, breeding (31)
6,891
Other cash expenses (32)
4,588
Livestock purchased
132,500
Hedging accounts deposits
20,000
d. Total Cash Expenses
$746,517
Net Farm Income (cash) (a - d)
$152,509
g. Depreciation
h. Total Farm Expenses (d + e + f + g)
i. Net Farm Income from Operations (c - h)
j. Sales of farmland
k. Cost value of land sold
l. Capital gains or losses (j - k)
Ending
$13,040
10,000
20,387
14,500
$57,927
$36,307
Beginning
$8,680
10,940
0
2,000
$21,620
Ending
$4,589
4,400
23,725
$32,714
($3,621)
$53,150
$832,353
$67,715
$100,000
$80,000
$20,000
m. Net Farm Income (accrual) (i + l)
$87,715
Value of Farm Production
(c - purchases of feed & livestock)
$588,418
$1,859
4,750
22,484
$29,093
Page 6
Your Farm Income Statement
Net Farm Income Statement
Name
Year Income
Cash Income (numbers in ( ) refer to IRS Sch. F)
Sales of livestock bought for resale (1a)
Sales of raised livestock, grain, etc. (2)
Cooperative distributions paid (3b)
Agricultural program payments (4b)
Crop insurance proceeds (6b)
Custom hire income (7)
Other cash income (8)
Sales of breeding livestock
Hedging accounts withdrawals
a. Total Cash Income
Income Adjustments
Hedging accounts balance
Crops held for sale or feed
Market livestock
Accounts receivable
Unpaid cooperative distributions
Breeding livestock
Other current assets
Subtotal of income adjustments
b. Net income adjustment (ending - beginning)
c. Total Farm Income (a + b)
Beginning
Ending
Expense Adjustments (paid in advance)
Investment in growing crops
Commercial feed on hand
Prepaid expenses
Supplies on hand
Subtotal of adjustments
e. Net adjustment (beginning - ending)
Expense Adjustments (due)
Accounts payable
Farm taxes due
Accrued interest
Subtotal of adjustments
f. Net adjustment (ending - beginning)
Beginning
Ending
Beginning
Ending
Expenses
Cash Expenses (numbers in ( ) refer to IRS Sch. F)
Car and truck expenses (10)
Chemicals (11)
Conservation expenses (12)
Custom hire (13)
Employee benefits (15)
Feed purchased (16)
Fertilizer and lime (17)
Freight, trucking (18)
Gasoline, fuel, oil (19)
Insurance (20)
Interest paid (21a + 21b)
Labor hired (22)
Pension and profit-share plans (23)
Rent or lease payments (24a + 24b)
Repairs, maintenance (25)
Seeds, plants (26)
Storage, warehousing (27)
Supplies purchased (28)
Taxes (farm) (29)
Utilities (30)
Vet. fees, medicine, breeding (31)
Other cash expenses (32)
Livestock purchased
Hedging accounts deposits
d. Total Cash Expenses
Net Farm Income (cash) (a - d)
g. Depreciation
h. Total Farm Expenses (d + e + f + g)
i. Net Farm Income from Operations (c - h)
j. Sales of farmland
k. Cost value of land sold
l. Capital gains or losses (j - k)
m. Net Farm Income (accrual) (i + l)
Value of Farm Production
(c - purchases of feed & livestock)
Page 7
Your Farm Income Statement
Statement of Cash Flows
Name
Cyclone Farm
Year 2017
Cash In
Cash farm income and expenses (operating)
Total cash income (line a, net farm income statement)
Total cash expenses (line d, net farm income statement)
Cash Out
$899,026
xxx
xxx
$746,517
Capital assets (investing)
Sales of capital assets
Cost of purchases and trades
$106,500
xxx
xxx
$102,000
Loans (financing)
New loans received
Principal paid on loans
$446,580
xxx
xxx
$524,070
Nonfarm (withdrawals)
Nonfarm income invested in the farm business
Cash withdrawn from the farm for family living, taxes, savings, etc.
xxx
Cash on hand (balance in farm checking and savings accounts)
Beginning of year
End of year
xxx
Total of cash in and cash out*
$1,458,252
xxx
$69,000
$6,146
xxx
$16,665
$1,458,252
*If all cash transactions are included correctly, the totals for the two columns will be approximately equal.
Statement of Owner Equity
Name
Cyclone Farm
Year 2017
Cost Value
Market Value
a. Farm net worth, beginning of year
$1,665,962
$1,820,062
(Line g, beginning net worth statement)
b. Change in market value of capital assets (net of depreciation)
xxx
$148,150
(Line i, ending net worth statement, market value __$166,865___ minus cost value __$18,715___)
c. Net farm income (accrual)
$87,715
$87,715
(Line m, net farm income statement)
same value for cost and market
d. Net nonfarm withdrawals: (nonfarm income invested - cash withdrawn)
($69,000)
($69,000)
(see statement of cash flows)
same value for cost and market
e. Calculated change in net worth (b + c + d)
$18,715
$166,865
f. Farm net worth, end of year (Line g, ending net worth statement)
$1,684,677
$1,986,927
g. Actual change in net worth (f - a)
$18,715
$166,865
(line e should approximately equal line g)
h. Percent of net farm income retained in the business this year ((c + d) / c)
21%
xxx
i. Percent of change in market value net worth from retained earnings
11%
xxx
this year (g, cost value / g, market value)
Page 8
Your Farm Income Statement
Statement of Cash Flows
Name
Year Cash In
Cash farm income and expenses (operating)
Total cash income (line a, net farm income statement)
Total cash expenses (line d, net farm income statement)
Cash Out
xxx
xxx
Capital assets (investing)
Sales of capital assets
Cost of purchases and trades
xxx
Loans (financing)
New loans received
Principal paid on loans
xxx
Nonfarm (withdrawals)
Nonfarm income invested in the farm business
Cash withdrawn from the farm for family living, taxes, savings, etc.
xxx
Cash on hand (balance in farm checking and savings accounts)
Beginning of year
End of year
xxx
xxx
xxx
xxx
xxx
Total of cash in and cash out*
*If all cash transactions are included correctly, the totals for the two columns will be approximately equal.
Statement of Owner Equity
Name
Year Cost Value
Market Value
a. Farm net worth, beginning of year
(Line g, beginning net worth statement)
b. Change in market value of capital assets (net of depreciation)
xxx
(Line i, ending net worth statement, market value _____________ minus cost value _____________)
c. Net farm income (accrual)
(Line m, net farm income statement)
same value for cost and market
d. Net nonfarm withdrawals: (nonfarm income invested - cash withdrawn)
(see statement of cash flows)
same value for cost and market
e. Calculated change in net worth (b + c + d)
f. Farm net worth, end of year (Line g, ending net worth statement)
g. Actual change in net worth (f - a)
(line e should approximately equal line g)
h. Percent of net farm income retained in the business this year ((c + d) / c)
i. Percent of change in market value net worth from retained earnings
this year (g, cost value / g, market value)
%
xxx
%
xxx